Fitch Affirms Edinburg, Texas' GO & COs at 'AA-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--As part of its continuous surveillance efforts, Fitch Ratings affirms Edinburg, Texas' (the city) general obligation (GO) bonds and certificates of obligation (COs) as follows:

--$17.1 million in outstanding GO refunding bonds at 'AA-';

--$40.9 million in outstanding combination tax and revenue COs at 'AA-'.

The Rating Outlook is Stable.

RATING RATIONALE:

--The city's historically strong financial position remains solid although its reserves have thinned moderately due to recent revenue and spending pressures.

--The local economy remains pressured but sound and is expected to benefit from several economic development projects that are expected to materialize over the near term.

--The city's population growth trends remain rapid, exceeding those of the county and state. Area income/wealth levels are below average.

--Historically strong, double-digit tax base growth reversed course in fiscal 2011 with a modest decline; stable home prices and renewed commercial construction is anticipated to produce modest gains over the near term.

--While overall debt levels are moderately high, the city's direct debt burden is low and is expected to remain so given management's historically conservative debt practices. Principal amortization is rapid.

KEY RATING DRIVER:

--Maintenance of the city's solid and stable financial position despite continued operating and capital pressures.

SECURITY:

The GO bonds and COs are secured by an ad valorem tax levied on all taxable property within the city, limited to $2.50 per $100 taxable assessed valuation (TAV). The COs are additionally secured by a subordinate lien on surplus revenues from the city's waterworks and sewer system.

CREDIT SUMMARY:

Edinburg, with an estimated population of approximately 77,000, is the county seat of Hidalgo County. The city's population growth has been rapid as part of one of the fastest-growing MSAs (McAllen-Edinburg-Mission) in the U.S. Located 20 miles from the Texas-Mexico border in the Rio Grande Valley along a major transportation route, the city serves as a distribution center, benefiting from the trade generated by cross-border manufacturing activity as well as the agricultural production in the region. Retail trade, government, education and health services are all major components of the area economy.

The local economy has proven resilient despite ongoing population growth and weaker overall economic conditions. Although the city's unemployment rate increased notably from 7.2% in April 2010 to 8.3% in April 2011, the rate remains well below those of the county and MSA at 11.4% for the same time period and slightly below the national level of 8.7%. Further economic expansion and employment opportunities are projected by the end of 2011 with the planned completion of a Federal Express distribution center and the first of a four-phase denim manufacturing facility at the city's second industrial park.

The city's top taxpayers represent a fairly diverse mix of business concerns; taxpayer concentration remains moderate at nearly 10%. Typical double-digit tax base gains since fiscal 2006 reversed course in fiscal 2011 with a modest 2% decline due largely to commercial inventory reductions. Management conservatively anticipates flat to modest growth trends in the tax base over the near-term. Although city officials report property tax collections have softened somewhat, management's conservative budgeting of these revenues at 90% - 92% in recent fiscal years has contributed to the city's continued solid financial performance.

Historically maintaining strong financial reserves with total general fund balances of no less than 32% of spending since fiscal 2001, general fund reserve levels remain solid but began declining modestly in fiscal 2008. Higher than usual transfers in from the solid waste fund bolstered general fund performance in fiscal 2009 and 2010. In fiscal 2010, the unreserved general fund balance reached $9.1 million or just over 23% of spending, which fell slightly below originally budgeted projections and the city's stated policy of maintaining no less than 25% of expenditures in fund balance, due in part to the required reclassification of an aging receivable. In addition, a nearly 4% decline in sales tax revenue, which provides roughly 30% of general operating revenues, further pressured fiscal 2010 results.

The fiscal 2011 $38.5 million operating budget was adopted as balanced; appropriations were held fairly flat as compared to amended fiscal 2010 spending levels. Fiscal 2011 operations are reportedly in line with budgeted numbers and year-to-date sales tax revenue have rebounded, exceeding prior estimates at 14% over budget and 6% ahead of sales tax revenue received in fiscal 2010. City officials attribute the year's strong revenue performance to additional economic and population expansion. Management projects adding approximately $1.7 million to general fund reserves, which would increase the unreserved fund balance to at least 28% of spending based on current positive revenue trends. For fiscal 2012, management anticipates adopting a balanced operating budget according to stated city policy using fairly conservative revenue assumptions.

Direct debt levels remain low, although overall debt levels rise to a moderately high $2,600 per capita or 5.6% of market value due largely to local school district debt levels. Principal amortization of the city's tax-supported debt is rapid with 72% repaid in ten years. City officials report no immediate plans to issue tax-supported debt as a plan of finance to determine the city's future debt capacity over the intermediate-term is currently under development.

The city's pension plan, as well as disability and death benefits, is provided through the Texas Municipal Retirement System (TMRS). The city's pension funded position is adequate but has remained fairly static, totaling 62.7% as of September 30, 2010, due largely to the previous implementation of actuarial valuation changes in the plan. The city has an eight-year phase-in period for contributing a higher annual pension cost (APC); equal to approximately $3.6 million in fiscal 2010, the city contributed less than 100%. The city provides other post-employment benefits (OPEB) to retirees up to age 65 in the form of group health insurance coverage. For those full-time employees who retired in 2001 or later, the city pays a generous 100% of the insurance premium on a pay-as-you-go basis. The unfunded actuarial accrued liability (UAAL) for the city's OPEB is manageable at $8.5 million.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010);

--'U.S. Local Government Tax Supported Rating Criteria' (Oct. 8, 2010).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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